Posted by Mark Daley and Peter Manley on 28 October 2022

The 11 October 50-page judgment of Hildyard J in The joint administrators of Lehman Brothers International (Europe) v FR Acquisitions Corporation (Europe) and JFB Firth Rixson will interest not only those who deal with ISDA Master Agreements (who may want to read the entire judgment), but also many lawyers and financial and commercial institutions. This is because the events of default which it had to consider, and especially the meaning of the word “continuing” in this context, are relevant to bonds, loans and various commercial contracts. 

Firth Rixson had been withholding sums payable to LBIE (with a total aggregate value of about USD64 million) since LBIE went into administration. In 2011 the CA held in the original case, Lomas v Firth Rixson, that Section 2(a)(iii) of the ISDA Master Agreements (both 1992 and 2002) was enforceable and entitled Firth Rixson to do this, with Longmore LJ famously noting that:

"The purpose of Section 2(a)(iii) is to protect the Non-defaulting Party from the additional credit risk in performing its own obligations whilst the defaulting counterparty remains unable to meet its own. The indefinite suspension of the payment obligation of the Non-defaulting Party (like any attempt to balance competing interests) may on one view be criticised as imperfect but it cannot be said to be uncommercial."

The original Event of Default that occurred was caused by LBIE going into administration in 2009, since which Firth Rixson has been refusing to pay on the basis that Section 2(a)(iii) allows it, so long as LBIE’s event(s) of default are “continuing”. However, by 2021, we had almost reached the conclusion of the administration, with LBIE being substantially solvent, and all the creditors having been paid. Did that then mean that Firth Rixson would now have to pay? 

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